In aggregate, municipalities budgeted for total revenue of R706.6-billion for 2025/26 and realised R360.7-billion by December 31, 2025, representing only 51% of spending.

This is according to National Treasury’s report on local government revenue and expenditure for the second quarter of the 2025/26 financial year, covering the performance against the adopted budgets of local government for the second quarter of the municipal financial year ending December 31, 2025.

Municipalities spent R312-billion at the end of the second quarter compared with the adopted budget of R698.1-billion. This consists of operating and capital expenditure.

Total operating expenditure was R283.9-billion in the second quarter compared with the adopted budget of R619.2-billion.

Total capital expenditure was R28.1-billion against the adopted budget of R78.9-billion.

The target for capital expenditure on December 31 was R36.3-billion, resulting in an underperformance of R8.2-billion (22.5%).

The observation over the previous years is that performance against the capital budget starts at a slow rate and spikes in the fourth quarter of the financial year, National Treasury explains.

However, incorrect reporting also distorts the performance where some municipalities reported negative capital expenditure, it points out.

The salaries and wages (including remuneration of councillors) budget for the financial year is R172.8-billion and the expenditure for the second quarter was R80.2-billion.

The budget for salaries and wages constitutes 27.9% of the total adopted operating expenditure budget of R619.2-billion.

There are 50 municipalities that reported negative cash balances for the second quarter of the financial year.

Analysis of the collection rates indicates that while municipalities have on average budgeted for a collection rate of 78.6% by the second quarter, the actual collection against billed revenue was only 69%.

Municipalities’ financial sustainability depends on their ability to collect outstanding debt from consumers, Treasury cautions.

Aggregate municipal consumer debts were R467.2-billion, compared with R405.1-billion reported in the second quarter of 2024/25.

A total of R5.4-billion (1.1%) was written off as bad debt.

Households have the highest outstanding debt at R335.3-billion, representing 71.8% of total outstanding debt of R467.2-billion.

Commercial (businesses) institutions owe municipalities R94.7-billion (20.3%) and organs of State R27.6-billion (5.9%).

The outstanding debt for a period over 90 days is R406.8-billion, representing 87.1% of total outstanding debt of R467.2-billion.

Treasury calls on municipalities to rigorously implement credit control and debt collection policies to collect outstanding debt, regardless of the period for which it has been outstanding.

It highlights the relationship between municipalities’ ability to collect outstanding debtors and payment of creditors.

If municipalities take long to collect debtors, it impacts on their cash flow and consequently delayed payments to creditors (suppliers), Treasury outlines.

The creditors’ age analysis shows that R160.8-billion (R127.9-billion reported in the second quarter) was owed by municipalities as at December 31.

Most of the creditors are outstanding for over 90 days at R135.9-billion (84.5%).

The major creditors are for bulk electricity at R87.9-billion (54.7%), trade creditors at R35.5-billion (22.1%) and bulk water at R27.3-billion (17%).

The amount owed for bulk electricity increased by R19.2-billion (28%) compared to the second quarter of the 2024/2025 financial year.

At a provincial level, municipalities in the Free State have the highest outstanding creditors greater than 90 days at R39.9-billion, followed by Mpumalanga at R31.8-billion and Gauteng at R27-billion.

The year-on-year increase in outstanding creditors could be an indication that municipalities are experiencing liquidity and cash challenges and consequently not settling their outstanding debt within the stipulated 30 days, Treasury posits.

CONDITIONAL GRANTS
The Division of Revenue Act allocated R176.8-billion (R169.8-billion in 2024/25) in direct transfers to local government for the 2025/26 financial year.

Over the medium term, direct transfers to local government account for 9.7% of national government’s non interest expenditure, and account for 9.8% when indirect transfers are added.

At year end, R30.4-billion or 68.4% of the R44.4-billion (excluding the Urban Settlements Development Grant) allocated to municipalities in direct conditional grants for period was transferred to municipalities.

National government departments reported expenditure of R19.7-billion, representing 44.2% expenditure of the R44.4-billion allocated to municipalities (64.6% of the transferred amount of R30.4-billion).

However, the reported expenditure by municipalities is relatively low at 39.1% of the allocation, Treasury notes, theorising that this indicates that some of the cash flow projections submitted to it to inform transfers were overly unrealistic, and that several municipalities were not adequately prepared to implement the planned 2025/26 projects.